Seriously. I know it’s a pain in the ass. Many pages of legal crap. But it is NOT due diligence to say, Hey, this is the biggest ETF in this category, so it MUST be OK!!!

Here is an example. I won’t identify this ETF by symbol, but it is a precious metals ETF, in the top 10 in the category, which means it has >$150MM in assets. I recently read this particular prospectus based on a question from a person considering buying it, which is why I picked it for this post. I’m not a lawyer, but I will do my best to read this document and make my assessments of what it means to an investor.

If I misread this or make a wrong statement in here, please comment and correct me. I would be THRILLED to know that my judgments here are not correct.

Let’s start on page 1:

Neither the Securities and Exchange Commission (SEC) nor any state securities commission has

approved or disapproved of the securities offered in this prospectus, or determined if this prospectus

is truthful or complete. Any representation to the contrary is a criminal offense.

So, right off the bat, this document is defined as useless. The bold is theirs, not mine. And if you say it’s not useless, you are committing a criminal offense. Which really means, there is no legally binding information available about this investment, other than if you buy it, you legally own… something? Maybe this is a boilerplate statement but I don’t see it in the prospectus of any PM fund I have owned.

Now page 2:

This prospectus, including the materials incorporated by reference herein, contains information

you should consider when making an investment decision about the Shares. You may rely on the

information contained in this prospectus. The Trust and the Sponsor have not authorized any person

to provide you with different information and, if anyone provides you with different or inconsistent

information, you should not rely on it.

OK, so we just said it’s not actually legally binding information, but you can rely on it? And no one is authorized to provide different or inconsistent information?

Listed in the Risk Factors section, and yep, I guess this is a risk!:

Shareholders will not have the protections associated with ownership of shares in an investment

company registered under the Investment Company Act of 1940 or the protections afforded by the

Commodity Exchange Act.

Also a risk factor, interestingly, since insurance is how you mitigate risk:

The Trust’s lack of insurance protection and the Shareholders’ limited rights of legal recourse

against the Trust, the Trustee, the Sponsor, the Custodian, the Zurich Sub-Custodians and any other

subcustodian exposes the Trust and its Shareholders to the risk of loss of the Trust’s Bullion for

which no person is liable.

Now this is a really interesting risk factor. Seems more like the entities collecting fees from the Trust are just transferring all the risk to the investors:

The Custodian’s limited liability under the Custody Agreements and English law may impair the

ability of the Trust to recover losses concerning its Bullion and any recovery may be limited, even in

the event of fraud, to the market value of the Bullion at the time the fraud is discovered.

Another risk factor, which again, sounds like not so much a risk as a method of transferring risk:

The obligations of the Custodian, any Zurich Sub-Custodian and any other subcustodians are

governed by English law, which may frustrate the Trust in attempting to seek legal redress against

the Custodian, a Zurich Sub-Custodian or any other subcustodian concerning its Bullion.

And some more regarding lack of legal recourse:

Although the relationships between the Custodian and the Zurich Sub-Custodians concerning the

Trust’s allocated Bullion are expressly governed by English law, a court hearing any legal dispute

concerning their arrangements may disregard that choice of law and apply Swiss law, in which case

the ability of the Trust to seek legal redress against any Zurich Sub-Custodian may be frustrated.

And some more “we’re not responsible.” It’s like this fund was set up by teenagers:

The Trust may not have adequate sources of recovery if its Bullion is lost, damaged, stolen or

destroyed.

And, hands down, my absolute favorite:

Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians

who may hold the Trust’s Bullion, failure by the subcustodians to exercise due care in the

safekeeping of the Trust’s Bullion could result in a loss to the Trust.

Well, this one is a close second:

Physical Bullion allocated to the Trust in connection with the creation of a Basket may not meet

the Good Delivery Standards and, if a Basket is issued against such Bullion, the Trust may suffer a

loss.

And there’s more. But to summarize, to this point: This document is useless, but it’s all you can get. You have no legal rights, and if you think you do, it will go to court in England. Or possibly Switzerland. Good luck there. Also, we’re not responsible for the stuff we are buying for you, and we are not holding anyone else responsible either. And we’re not insuring it. And it might not be the real stuff anyway.

If you continue reading then you get to the part where it says, We are using the same awesome financial controls as MF Global did (in so many words, i.e. unallocated accounts). Also the part that says that they don’t really even know what the custodians are holding for them.

On the bright side, I didn’t see anything in here about them loaning out all the assets like some other precious metals ETFs do. Then again, who would want to borrow something as indeterminate as this.